Why Don't Latvian Pension Funds Diversify More Internationally?

20 Pages Posted: 2 Nov 2005

See all articles by Laurens Swinkels

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Asset Management - Quantitative Investing

Diana Vejina

Stockholm School of Economics in Riga

Rainers Vilans

Stockholm School of Economics in Riga

Date Written: November 30, 2005

Abstract

Latvian employees have to choose a pension fund for the second-pillar of the Latvian pension system. These pension funds invest about 85% in domestic assets. In this paper, we address the question why this strong home bias might exist. Firstly, we conclude that the Latvian pension law is strict on international diversification. However, not to the extent that it can fully explain the home bias. Secondly, our empirical analysis suggests that international diversification lowers investment risks for Latvian (pension) investors. Thus, it seems hard to explain the home bias of Latvian pension funds by lack of diversification benefits. Thirdly, Latvian pension fund managers might have more (private) information about Latvian companies than international companies. Therefore, they might prefer to invest more domestically to add more value for their clients. Finally, Latvian employees might have a strong preference to invest in companies they are familiar with. Since we are not aware of any research on the latter two topics, we can only speculate that currently many investment policies are suboptimal for Latvian employees saving for retirement. We expect the Latvian pension industry to develop new products that reduce risk by allowing for more diversification. In addition, we recommend Latvian employees to pay attention to the investment policy of their pension fund and think carefully about the rewards, risks, and costs that are involved.

Keywords: Home Bias, Emerging Markets, International Investing, Pension Funds

Suggested Citation

Swinkels, Laurens and Vejina, Diana and Vilans, Rainers, Why Don't Latvian Pension Funds Diversify More Internationally? (November 30, 2005). ERIM Report Series Reference No. ERS-2005-078-F&A. Available at SSRN: https://ssrn.com/abstract=838524

Laurens Swinkels (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Asset Management - Quantitative Investing ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

Diana Vejina

Stockholm School of Economics in Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia

Rainers Vilans

Stockholm School of Economics in Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia

Register to save articles to
your library

Register

Paper statistics

Downloads
137
rank
205,621
Abstract Views
1,840
PlumX Metrics